The higher-education story of the week is about cost: colleges and universities are cutting prices. At least that’s the impression one gets from media coverage of the annual report from the National Association of College and University Business Officers (NACUBO). “Colleges Cut Prices by Providing More Financial Aid,” states the Wall Street Journal. “Private U.S. colleges, worried they could be pricing themselves out of the market after years of relentless tuition increases, are offering record financial assistance to keep classrooms full.”
Many colleges are “lowering” prices, but not because they’re messing with their hefty sticker prices. In fact, American colleges and universities engage in a massive system of price discrimination, offering students varying discounts from the sticker price depending on family income and assets, number of children in college, and other family financial factors. While the amount of the discount largely depends on a family’s ability to pay for college, many colleges also offer price breaks to students based on “merit,” as measured by SAT scores and high school GPA.
According to the NACUBO’s 2012 Tuition Discount Study, the average tuition discount for freshmen rose to a record 45 percent. “In fact, the report says, the “growth in the freshmen discount rate between 2010 and 2011 was 2.3 percentage points, the largest one-year increase in the nearly 20-year history of the discounting study.”
Here Come the ‘Enrollment Managers’
Indeed, higher education is a curious and strange business – and it’s not generosity that’s driving colleges and universities to provide more financial aid. Instead of just slashing sticker prices to stay competitive, colleges offer “tuition discounts” in the form of scholarships and grants of various amounts. The bottom line is what’s called the net price, which is the total cost of attendance – sticker price plus expenses – less institutional grants and scholarships. By making some students and parents pay full fare, or close to it, while offering discounts to less wealthy students, colleges attempt to maximize net tuition revenue. Indeed, after many years of engaging in the “high sticker price, high discount” business model, colleges have acquired armies of “enrollment management” consultants who advise colleges on the best strategies for maximizing tuition revenue.
After years of relative stability, between the years 2000 and 2006, when average tuition discounts for freshmen ranged between 37 and 38 percent, discounts began to climb more rapidly. In those relatively flush economic times of the mid 2000’s, many colleges were engaged in a sort of arms race for certain high-achieving students whose enrollment and matriculation would boost average SAT scores and boost the institution’s ranking on college guides such as U.S. News & World Report. Colleges attempted to attract such students with hefty discounts.
Smaller Colleges Suffered More
But the Great Recession arrived, and students and families took big hits on income and wealth. According to the US Federal Reserve’s Study of Consumer Finances released in 2012, the median value of inflation-adjusted pre-tax income fell 7.7 percent from 2007 and 2010 and median net worth of families fell 38.8 percent. In order to maintain enrollments during the recession, colleges steadily ratcheted up discounts.
Tough times were especially punitive to smaller colleges. Many of these colleges struggled to maintain enrollments and used discounts to stem enrollment losses. But often the discounts simply gobbled up revenues because student demand for many of the weaker institutions wasn’t sufficient to offset the price cuts. Indeed, the discount rate at small colleges rose to 46.2 percent in 2012 compared to 41 percent and large research institutions and just 40 percent at comprehensive doctoral universities.
The Great Recession may have changed the higher-education industry for good, serving as a wake-up call for wholesale reforms in pricing. Poor economic conditions exposed profound weaknesses in Americans’ ability to pay for college. Financial need will remain high, but poorly endowed private schools will continue to struggle to stay competitive and stave off enrollment declines. Also, public universities are seeing state tuition subsidies erode, and they face pressure to raise tuitions to uncompetitive levels.
Apart from the most desirable, highly branded colleges and universities, the rest of the industry has reached an unsustainable state. Long-term demographic projections suggest enrollment growth will continue to hold steady or even decline. Too many financially strapped institutions suggest that the industry may be overcapitalized and due for a shakeup – with too many relatively weak institutions chasing a limited number of desirable students. Making matters even more complicated is that financial need continues to grow and the condition of family finances remains tenuous.
“It gets harder every year,” one chief business officer reported in the NACUBO’s survey. “There are many indicators the business model that higher education has relied on for many years may have to change.”
